When A Media CEO Says That A 20% Quarterly Revenue Increase Over Last Year Isn’t Good Enough, Then You Know That Has To Be An Internet Business

Philip M. Stone October 19, 2006

Yahoo’s 3rd quarter revenue was 20% higher than last year, but its net profit was down 37.5%, and its CEO is going on the warpath.

“I am not satisfied with our current financial performance and we intend to improve it,” said Yahoo CEO Terry Semel. “We have continued to grow our business at a pace many other companies would envy. But that’s not good enough for us. We are not exploiting our considerable strengths as well as we should be, and we are committed to do it better.”

The net profit drop was due to stock options and higher expenses, and the company has already started what, for it, is cost cutting by telling employees that much of the company will basically close the week after Christmas and that will count against any untaken vacation time.

Dow Jones, on the other hand, heavily into print, which it wants not to depend on so much, reported a third quarter overall revenue gain of 3.9% which in percentage terms compares very favorably to its print rivals. Look closely into the details, however, and the flagship Wall Street Journal reported advertising revenue in the third quarter was up all of 0.3% versus the same period last year, on a linage increase of 1.1%, but September was a particularly weak month. On the other hand, Dow Jones Online advertising was up 12.4% for the quarter, and that was with a soft July.

So it’s no wonder that CEO Richard Zannino wants the world to know “We have many initiatives underway to diversify our reliance on print advertising revenue.”

Ever since Yahoo announced last month that its 3rd quarter was going to come in at the low end of forecasts the company has taken a battering. Most analysts believe that the drop in advertising revenues from the financial services and automotive segments are Yahoo problems as opposed to general Internet advertising problems, and Yahoo’s share price has taken a hammering – it’s down around 40% this year.

Google’s own third quarter results were, however, fantastic. Earnings per share were up 56% over the same period a year ago, sales were up 70%  and profit rose 90% (again, traditional media, eat your heart out!). Yahoo’s third quarter earnings per share by comparison were down 31% from a year ago, and that points out one of Yahoo’s big problems these days – it is always being compared to Google.

There was a time when their earnings were pretty similar, but for the last year Yahoo has either stood still or declined its quarterly earnings per share whereas Google has kept spurting up, although the third quarter earnings of $2.36 per share is less than the second quarter’s $2.49.

But there are analysts out there who believe the US Internet advertising surge is about to mellow, if it hasn’t already done so, and that revenue from international operations are becoming ever more important.

They dissect Google’s 2005 revenues of $6.139 billion and note that just $3.745 billion (61%) came from its U.S. operations. That means an increase of only $300 million, or about 7 percent, year-over-year from the US. And the story at Yahoo is not much different. Yahoo's sales in the U.S. grew 14% year-on-year, while international sales grew 29%.

On the other hand there is the very much respected Mary Meeker at Morgan Stanley saying that the Internet advertising revenue is going to more than double by 2010. She says the Internet will grab 13% of the total US ad spending in 2010 – that’s $31.6 billion of the total $243 billion spend – compared to a 7% share in 2005 equaling $13 billion of the total $192 billion spend.

She believes that as measurement tools mature, advertiser budgets will veer more and more to the Internet. And she believes that the number of US web surfers will grow 3% annually to hit 229 million by 2010.

Over at Merrill Lynch media analyst Lauren Rich Fine is a bit more conservative with her online view, noting that advertisers are trying all sorts of digital spending  ranging from mobile phones to video on demand, games etc., -- in other words it’s not just the Internet by itself any more when one talks about the digital spend.

She again predicts that newspapers will have no growth this year and the range is just 1.1% gain to 1.5% down for 2007.

Google has gotten the most positive press this month because of its $1.65 billion all-share purchase of YouTube. But Yahoo has not been idle. Just this week it quietly bought Adinterax, a private company specializing in tools for use in creating video advertising. It also said it was taking a 20% stake in Right Media, a company that runs an exchange for companies to buy and sell ads online.

Perhaps even more important it announced that its Panama search marketing platform has gone live. It provides an ad ranking system similar to Google’s Ad rank.

Meanwhile back at Dow Jones, its shares closed down 2.6% after announcing its third quarter results. Analysts didn’t like that September was such a disaster at the Wall Street Journal -- down 5.9% -- with a lack of  technology, classified, general and financial ads mostly to blame.

But if it’s any comfort to the traditional media giant, at Yahoo it was even worse. Having a day to think about Yahoo’s results and the company’s forecast that the fourth quarter may not meet expectations Wall Street voted with its feet sinking the shares another 4.8%. As for Google  -- there’s that comparison again -- the day before its 3rd quarter earnings announcement, the shares finished down about 0.3%, and once they were announced they immediately went up 4% in after-hours trade.

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